How to Analyze Business Structure and Predict Profits? 2

How to Analyze your Profits Margin in your Business.

On how to analyze your business profits, the contribution margin is sales minus variable costs.

If the contribution margin is negative, you can think of it as a structure in which the more sales you generate, the more you lose.

The company needs to fundamentally figure out why the contribution margin is negative.

We need to see if each sale is negative because of incorrect pricing, or if the variable cost is incorrectly measured as a temporary promotion.

If you don't find the cause, you can't plan to reach the break-even point.

It's a project that keeps getting negative no matter how you try, so shouldn't it be done in the first place?

If the product has value in the market, the contribution margin will always be greater than zero.

After calculating the contribution margin like this, let's compare it with the fixed cost.

In the beginning, of course, the contribution margin is small.

Fixed costs such as labor costs, office rent, and marketing costs will be much higher than variable costs.

For example, let's say that service with sales of 100 has a variable cost of 20 including server fees.

In this case, the contribution margin is 80.

If the fixed cost is 300, the operating profit of this business is -220, and the situation is in red.

The contribution margin target to achieve break-even is at least 300. Plan in detail the sales volume and how to achieve it to reach this goal.

If you are a company that sells products, you can estimate the number of sales by calculating the approximate contribution margin per unit of product.

If it is a service company, it can be identified by MAU or the number of users who actually purchase it.

You can now create a plan to achieve your goals.

This plan includes the concept of 'time'.

Because our time is limited, we can't plan to do it all in a month or two.

And the other thing you probably need is 'funds'.

Marketing costs to increase users, additional fixed costs, etc.

Because of the effort put in to increase the contribution margin, the fixed cost naturally increases as well.

Realistic simulations enable realistic measurements of time, cost, and intermediate goals.

Now, let's refer to the benchmarking material above as we turn our plans into reality.

It is important data to verify whether our estimated plan is significantly different from reality.

For example, the industry estimates the average profit margin to be around 10%, but in our data, the profit margin is 40%?

Clearly, some unrealistic indicators were included.

Data from the companies we benchmarked cannot be the same as ours.

However, excessively different numbers can also be a clue to discovering errors in the estimation process.

Analyzing business structure (3) Analyzing our company (when there is no data) If you have enough data like this, you can measure realistic contribution margins and fixed costs, and also analyze the time and cost it takes to reach the break-even point.

What about startups without data about their business profits and profit margins, how will they analyze it?

More estimates are needed. You need to create a 'virtual number', not a parsed number.

It is closer to 'business model design' than 'analysis'. The process of analyzing the number of No. 1 companies is the same.

And let's list the expenses that will be required to proceed with the business in the future.

Write down the expected costs such as marketing, labor costs, logistics costs, and PG commissions.

It is okay to copy the same items in the financial statements of the benchmarked company.

Among them, we boldly delete items that we will not need in the beginning.

So, we prioritize items that are absolutely necessary from the beginning and items that we will need later.

It also distinguishes between variable and fixed costs.

How to calculate and analyze 'Cost' for your business profits?

Variable costs are highly likely to be defined as "what percentage of sales", and fixed costs can be summarized in one or two lines. (marketing budget 100, rent 50, etc.)

The item that early-stage companies should pay the most attention to is 'labor cost'.

Write down the number of people required and the cost of labor per person.

And the final required labor cost is summarized in the formula 'labor cost = the number of people X salary'.

Since the number of people required will change every year, you need to keep updating even after organizing once a year.

'The labor cost for 2021', 'The labor cost for 2022'.

After organizing the costs, let's first calculate the sum of the fixed costs.

Don't calculate your variable costs yet.

It is only necessary to determine what percentage of sales is a variable cost.

You also need to determine your projected sales.

Methods of determining projected sales vary so much from company to company, so I won't go into detail.

There are various forms such as billing method per service user, subscription model, and product sales in the case of a commerce company, so it is not easy to explain with just one.

Define how your company generates revenue, and estimate accordingly.

Sales estimating is the process of defining the key variables, the main causes of fluctuations in sales.

By properly organizing this variable, you can also determine how sales rise and fall as the variable increases or decreases.

For example, a commerce company
\ㅇ Product sales X price
|ㅇ MAU x ARPU
/ㅇ Subscribers X subscription fee, etc.

Although business models vary, it is important to simplify the configuration so that it can be defined as 'quantity x price'.

Having defined sales like this, let's find out when we can reach the break-even point by calculating the contribution margin and fixed costs as described above.

Don't forget to compare it with the cost structure and profit margin of the benchmarked company.

Make your analysis realistic to make your differentiation realistic.

Cost structure analysis is an important task that needs to be done every year.

We need to analyze how the business structure is changing and why our company is currently making profits or incurring a loss so that we can develop a plan that suits the situation.

Actual sales and expenses do not match the predicted numbers? Do not worry.

Predictions and reality are bound to be different. We're not making predictions, we're working on setting 'standards' for predictions.